Opinion
14110
July 17, 1935.
Before SEASE, J., Cherokee, June 1934. Affirmed.
Action by B.S. Bonebrake and another, as receivers of the Bank of Blacksburg, against C.A. Jefferies and others, as receivers of the American State Bank. From a judgment for the defendants, the plaintiffs appeal.
Decree of Judge Sease, directed to be reported, follows:
This cause came on to be heard by me on exceptions by the plaintiff to the report of Donald Huggin, Esq., Special Referee, to whom it was referred by an order of this Court to take testimony and report his findings of fact and conclusions of law, with leave to report any special matter.
The Referee has construed the plaintiffs' complaint as an action to recover against the receivers of the defendant bank upon a cause of action charging the American State Bank as trustee ex maleficio, and that the issue must be determined upon the cause of action so stated. There is no exception to the Referee's construction of the complaint, and that construction is adopted by the Court.
As held in Livingstain v. Columbian Banking Co., 77 S.C. 305, at page 310, 57 S.E., 182, 184, 22 L.R.A. (N.S.), 442, 122 Am. St. Rep., 568, in an opinion written by that eminent jurist, Mr. Justice C.A. Woods, "No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors." This does not mean that a creditor who is entitled to a preference may not recover upon a proper showing that he is entitled to be paid in preference to other creditors, but that right must be established in accordance with the principles of law and equity as defined by the Court of this State. As said by Mr. Chief Justice McIver in White v. Commercial Farmers' Bank, 60 S.C. 122, at page 128, 38 S.E., 453, 455, "To entitle him to such priority, he must show that his so-called trust fund, in some form, has gone into the assets of the bank now in the hands of the receiver; and this he has failed to do, so far as appears from the facts before us."
As to the nature of a trust ex maleficio, the controlling principles are fully discussed and decided by the Supreme Court in the cases of Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E., 239, 243, and Hampton County v. Lightsey, Receiver, 164 S.C. 63-75, 161 S.E., 879, 881. In both cases the Court approved the following rule: "But the case [referring to ordinary constructive trusts] is quite different from a constructive trust ex maleficio. There the trustee has acquired no more title to the misappropriated fund than a thief would have acquired. As a matter of law and morals he occupies that detestable position; and the beneficiary occupies a much more favorable position than that of the general creditors or the beneficiary of a simple constructive trust. If it can be shown, therefore, that the misappropriated fund went into the coffers of the corporation prior to receivership, was disbursed by the corporation in the payment of its debts or in the acquisition of property, there can be no reason or justice in allowing the general creditors to receive the benefit of the stolen property, simply for the reason that a corresponding amount of money was not turned over to the receiver. The corporation will have received the benefit of the stolen fund by the reduction protanto of its liabilities; the general creditors should not be heard to say that they may hold on to the benefit of the theft and not account for it."
Under this rule, before a trust ex maleficio can be enforced against the receivers of an insolvent bank, it must be shown that the bank, prior to the receivership, misappropriated trust funds, with knowledge of their character as such, either by paying with such trust funds obligations of the bank, or by acquiring property. It must be shown that the bank received some benefit as the result of its misappropriation of trust funds.
It follows, as a necessary corollary to the foregoing principles, that if the bank received no benefit by reason of the transactions, and acquired no property, innocent general creditors of the bank cannot be held to pay the loss sustained by the beneficiary.
This principle has been followed in the more recent case of Spartanburg County v. Arthur et al., as Receivers of Bank of Union, 169 S.C. 456-462, 169 S.E., 235. In that case, Miller was treasurer of Spartanburg County, and had on deposit in certain banks of Spartanburg public funds of Spartanburg County, deposited to his account as treasurer.
Miller also "headed" the Bank of Duncan, a private banking corporation.
The Bank of Duncan, "headed by Miller," was indebted to the Bank of Union.
In order to discharge the indebtedness of the Bank of Duncan to the Bank of Union, Miller drew three checks against his accounts as treasurer in the Spartanburg banks, making them payable to the Bank of Union. The Bank of Union, at the instance of Miller, applied the proceeds of these checks to the payment of the indebtedness of the Bank of Duncan to the Bank of Union, with knowledge that the funds so appropriated were public funds of Spartanburg County.
There the Bank of Union derived a direct benefit by the appropriation of known trust funds to the payment of a debt owing to it. The facts, therefore, bring that case clearly within the rule of the Bank of Aynor and Hampton County cases.
The Referee finds, and the evidence sustains his findings, that no funds of the former receiver of the Bank of Blacksburg were wrongfully appropriated by the American State Bank for its use or benefit, but that the trust funds were misappropriated by the former receiver.
The Court held, 169 S.C. 456, at page 458, 169 S.E., 235: "When the bank thus joined with Miller in applying the proceeds of these checks, representing, as they did, trust funds, in violation of the trust under which they were held, the bank made itself privy to Miller's appropriation to the extent of such checks, and became chargeable as a trustee ex maleficio."
The plaintiffs, by their first and eleventh exceptions, charge the Referee with error in not finding that the plaintiffs could recover the amounts of several deposits to the credit of Thomas B. Butler's personal account instead of to his account as receiver. The totals of these items amount to $620.95, and are four in number. It appears that T.B. Butler made out these four deposit slips in the name of T.B. Butler, receiver, but the account of T.B. Butler as an individual was given credit for the deposits, through mistake as the testimony shows. The evidence further shows that each month the bank furnished to all depositors monthly statements of deposits and withdrawals containing a printed notice to depositors to call to the attention of the bank any errors. It does not appear that the bank derived any benefit or advantage by these transactions. The error could have been detected and corrected by T.B. Butler, who was still liable as receiver for these funds, although deposited to his personal account. There is no law in this State that requires a receiver to deposit trust funds in a separate account, nor was this required by the order appointing Butler as receiver. He could have deposited all trust funds to his personal account, put them in his pocket, or in his individual safe. His duty was, on a final accounting and settlement, to account for all trust funds, and that was the condition of his bond. These circumstances are not sufficient, under the rules above stated, to charge the American State Bank as trustee ex maleficio.
In the case of Charleston Paint Company v. Exchange Banking T. Co., 129 S.C. 290, 123 S.E., 830, the Court held that the bank, even with knowledge of the existence of the trust, may safely assume that, although the deposit be entered to the credit of the fiduciary's account as an individual, or as attorney, he will faithfully disburse it.
Regarding the transactions of the former receiver, it must be remembered that as receiver he had exclusive control of the trust funds, so far as the American State Bank was concerned; he had the power to deposit such funds to his personal or receivership account. The bank's duty was to pay all checks properly drawn by the receiver so long as there remained funds to his credit. No bank is required to exercise inquisitorial functions with its depositors: Merchants' Planters' Nat. Bank v. Clinton Mfg. Co., 56 S.C. 320, 33 S.E., 750. The relation of a depositor, whether an individual or a fiduciary, to a bank is that of creditor and debtor. Leaphart v. Commercial Bank, 45 S.C. 563, 23 S.E., 939, 33 L.R.A., 700, 55 Am. St. Rep., 800; Wilkes Co. v. Arthur, 91 S.C. 163, 74 S.E., 361.
If, as contended by the plaintiffs, that D.C. Ross, president of the bank, had guilty knowledge of the transactions of the former receiver and permitted him to use trust funds in an illegal way, it is not shown that Ross was acting in this respect in the interest of the bank, or that the bank derived any benefit from such transactions. In the absence of proof showing that the bank derived any benefit or advantage by appropriating any of the trust funds to the payment of obligations owing to the bank, or in the acquisition of property, the bank cannot be held to liability as a trustee ex maleficio. The innocent depositors and creditors of the American State Bank, who are entitled to have the assets of the insolvent bank distributed ratably among them, are not to be subjected to the penalty of having such assets appropriated to the payment of the plaintiff's claim, even though there may have been an understanding between Ross, the president, and Butler, the receiver, that the latter should be permitted to use the trust funds in an illegal manner; the bank having derived no benefit or advantage from such transactions.
The judgment of the Court is: That the exceptions to the report of the Special Referee be overruled, the report confirmed, and that the complaint of the plaintiffs be dismissed, with costs.
Messrs. Wilson Wilson, Raymond W. Dobson and L. G. Southard, for appellant, cite: As to knowledge of misappropriation of funds: 44 F.2d 11; 218 N.Y., 106; 112 N.E., 759; L.R.A., 1916-F, 1059; 129 S.C. 300; 228 F., 317; 137 U.S. 411; 11 S.Ct., 118; 34 L.Ed., 724. Liability of bank: 86 Md., 400; 38 A., 983; 39 L.R.A., 84; 63 A.S.R., 513; 71 L.Ed., 1158; 73 L.Ed., 993; 35 F.2d 6; 39 S.C. 294; 17 S.E., 977; 9 A.S.R., 721; 135 S.C. 190; 13 S.C. 5; 36 Am. Rep., 678; 146 U.S. 499; 36 L.Ed., 1059; 165 U.S. 634; 41 L.Ed., 855; 28 F.2d 176.
Messrs. Hall, Vassy Hall, for respondents, cite: Claim for preference: 144 S.C. 147; 156 S.C. 181; 164 S.C. 63; 169 S.C. 456; 164 S.C. 261; 75 S.C. 122. Imputed knowledge: 50 S.C. 289. Liability of bank: 43 S.C. 233; 41 S.C. 177; 12 Rich., 518; 56 S.C. 320; 154 S.C. 316; 129 S.C. 290; 274 U.S. 473; 137 U.S. 411; 34 L.Ed., 724; 152 So., 121; 55 F.2d 130.
July 17, 1935. The opinion of the Court was delivered by
In 1927, Thomas B. Butler, now deceased, was appointed by the Court as receiver of the defunct Bank of Blacksburg. In September, 1929, as the result of an audit made in the matter, it was discovered that he was short about $27,425.00 in his receivership accounts. Thereafter, the American State Bank, in which the trust funds had been deposited by Butler, was also placed in the hands of receivers, against whom this action was brought to recover the full amount named. After setting out some of the items constituting the shortage, the complaint alleged, among other things, that the American State Bank aided and participated in the misappropriation of the trust funds deposited with it, by permitting the receiver to check out such funds for purposes other than that of the trust, knowing or having information at the time that they were being misappropriated by him; and that the depository bank, for that reason, and for the additional reason that it received and applied the proceeds of certain checks to the payment of personal obligations of Butler to it, became liable as trustee ex maleficio of the funds so misappropriated. The defendants, by their answer, denied the material allegations of the complaint.
The Special Referee, to whom the case was sent, found as a matter of fact that the American State Bank did not receive any of the trust funds alleged to have been misappropriated by Butler or derive any benefit or advantage from any of the transactions named; and that the bank was not, therefore, as a matter of law, responsible as trustee ex maleficio, as claimed by the plaintiffs. On exceptions to the report, the Circuit Judge concurred in the Referee's findings of fact, and gave judgment for the defendants.
A careful study of the record for appeal convinces us, applying correct legal principles to the facts of the case, that Judge Sease reached the right conclusion, and we approve the result of his decree. His order, therefore, which will be reported, is affirmed.
MESSRS. JUSTICES CARTER, BAKER, and FISHBURNE, concur.
MR. JUSTICE BONHAM disqualified.